A recent case has highlighted the dangers of divorce for the self employed.
If you are a PAYE employee, your annual salary is set out in your P60 and payslips. If you are self-employed, your income is likely to be more complex, and probably, more uncertain. Financial uncertainties can cause problems when trying to resolve a financial settlement on divorce.
In a case initially started in 2011 in London called CR v SR *, the couple had £330,000 in property, and debts of £39,000. The wife worked part time, and received benefits, and brought in £2,200 per month. The husband was in a partnership, with a partnership account which was overdrawn by £300,000 and the business interests had no value.
An accountancy report was obtained to decide on the husband’s future income. The accountant decided that the husband’s company could grow by 20%, 30% or potentially even 40%. The District Judge who had been asked to decide on the financial split concluded that, looking at the report, the husband could draw £5,700 per month, and therefore could afford to pay £2,750 to the wife every month, until the wife died or remarried. The District Judge also transferred the house, and the equity in it, to the wife. This left the wife with £330,000 and income of nearly £5,o00 per month from earnings and maintenance.
The husband appealed to a higher court, as he felt this decision left him with lots of debt, little income and no money to buy another house. That judge agreed with the husband that he had a reasonable prospect of success in demonstrating that the decision was not fair, particularly because there was no guarantee that the husband could actually earn £5,700 per month, regardless of what an accountancy report said.
The judge thought that one sensible way of proceeding would be to have a set amount of maintenance paid to the wife each year, with a top up at the end of the year, if the husband had a particularly profitable 12 months. The case does highlight the difficulties that can arise when arranging a financial division if there is uncertainty about the financial figures involved. Whilst an accountancy report can try to predict the profitability of a business, an inaccurate report can leave a self-employed earner in the position of having to meet a maintenance order which he or she does not have the ability to pay. We will have to wait until the appeal decision to discover whether the judge follows the top-up suggestion, but it does appear to offer both parties the chance to share in the profits, but saves the husband from financial difficulties which will arise if the accountant’s report is too optimistic.
* EWHC 1155
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